On May 19, 2012, the Ministry of Commerce of the Republic of China (“MOFCOM”) conditionally cleared the acquisition by Google Inc. (“Google”) of Motorola Mobility Holdings, Inc. (“Motorola”) (the “Transaction”).
MOFCOM’s approval represents the final hurdle for the Transaction, which has already been approved by the U.S. Department of Justice (“DOJ”), the European Commission (“EC”) and other antitrust authorities. MOFCOM, which reviewed the Transaction under China’s 2007 Anti-Monopoly Law (“AML”), is the only regulator to have cleared the Transaction with conditions. This is the latest in a series of merger clearance reviews where MOFCOM has gone further in imposing conditions than both the U.S. antitrust authorities and the EC. (We noted the earlier instances in a prior client newsflash. See Chinese Antitrust Authorities Approve Western Digital/Hitachi GST Deal with Significant Conditions (March 9, 2012), available here.)
This case underscores yet again the increased importance of Chinese competition law, particularly (but not exclusively) in connection with the regulatory review of mergers and acquisitions.
Google develops and distributes Android, a leading operating system for smart mobile devices (e.g., smartphones and tablets). Motorola designs and manufactures a range of smart mobile devices. Many analysts have suggested that Google's primary motivation in making this acquisition was to acquire Motorola’s extensive patent portfolio—approximately 17,000 existing patents and 6,800 pending patent applications—and so enable it to better defend itself and its smart mobile device licensees from the threat of patent infringement litigation.
DOJ and EC Reviews
On February 13, 2012, both the DOJ and the EC announced that they had approved the Transaction without conditions. Both expressed concern over Google's refusal to make a commitment not to seek injunctions in certain patent infringement litigations involving competitors, but concluded that this was consistent with Motorola's premerger practice. Since the merger did not change the status quo, the DOJ and the EC concluded that such concerns would have to be addressed in the future, separate from the merger. Both authorities stressed that their conclusions were restricted solely to the transfer of Motorola’s patents, and that Google’s future use of those patents will be closely monitored.
The parties notified MOFCOM of the Transaction on September 30, 2011. In December 2011, following a preliminary review, MOFCOM initiated a second phase review, which was extended with the consent of both parties in March 2012.
In its May 19, 2012 conditional approval decision (the “Decision”), MOFCOM identified several reasons for concern regarding the impact of the Transaction on the smart mobile device operating system market, including: (1) Android currently dominates that market in China (Android has 73.99% market share; its nearest competitors, Nokia’s Symbian and Apple’s iOS, have 12.53% and 10.67%, respectively); (2) the resultant dependence of Original Equipment Manufacturers (“OEMs”), developers of Android-compatible software (i.e., “apps”) and end-users on Android’s ecosystem; (3) the high barriers to entry into the market; and (4) the likelihood that Android will retain its market dominance for the foreseeable future (owing to Google’s overall financial strength, the high costs of Apple’s iPhone and the relative infancy of Microsoft’s product offering).
MOFCOM cited two examples of the sorts of anticompetitive behavior that it fears Google will be incentivized to engage in following the Transaction: (1) favoring Motorola over other smart mobile device OEMs by providing it with advance access to Android software updates; and (2) licensing Motorola-owned patents to competitors on unfair terms.
Neither the DOJ nor the EC reached the conclusion that MOFCOM did with regard to Google's incentive to favor Motorola over other smart mobile device OEMs. Presumably, the lack of concern in this regard reflects Motorola's relatively small share of the smart mobile device market, which arguably reduces Google's incentive to disfavor other more successful Android licensees. MOFCOM did not explain why it reached a different conclusion regarding Motorola's incentives.
In light of its concerns, and following consultations with Google, MOFCOM approved the Transaction subject to four conditions. The Decision requires Google to:
- continue to license Android in a free and open source manner (this condition does not apply to apps);
- treat all OEMs in a nondiscriminatory manner (this condition does not apply to apps or to OEMs that modify the Android platform);
- honor Motorola’s existing current Fair, Reasonable and Nondiscriminatory (“FRAND”) obligations with respect Motorola’s patents; and
- appoint an independent trustee charged with monitoring adherence to the above conditions, and submit reports every six months to the trustee and MOFCOM.
Conditions 1, 2 and 4 apply for five years, though Google may request that 1 and 2 be modified or rescinded if market conditions change.
MOFCOM’s Decision is interesting in several respects. First, it provides further evidence that merging parties must give significant attention to the Chinese antitrust regime—even in transactions that involve only U.S.-based firms. This is the third time (after GM/Delphi and Seagate/Samsung) that MOFCOM has imposed conditions on a transaction that was earlier unconditionally approved by U.S. antitrust authorities and the EC. In transactions where the DOJ and EC have imposed conditions, MOFCOM has in some cases (e.g., Western Digital/Hitachi) elected to impose more stringent conditions. Second, MOFCOM’s review was lengthier and more wide-ranging than the DOJ’s and the EC’s—further evidence that the AML may delay or significantly add to the timetable for closing deals. Third, the Decision is yet another demonstration of MOFCOM’s apparent preference for approving transactions subject to conditions rather than rejecting them outright. The Decision represents MOFCOM’s thirteenth conditional clearance since the AML came into effect in 2008. It has rejected only one proposed transaction (Coca-Cola’s failed acquisition of Huiyuan) outright.